More on Bernanke's “Bad News Principle”

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More on Bernanke's “Bad News Principle”

Author Info

Yishay D. Maoz (University of Haifa)

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Yishay David Maoz

Abstract

The role that Bernanke’s Bad News Principle plays in the modern theory of investment under uncertainty is analyzed. The analysis shows that the actual investment dilemma is that by delaying investment firms trade off a higher present value of earnings for a lower present value of the investment cost, in contrast to previous interpretations of this dilemma. The economic interpretation of the Smooth Pasting Condition is clarified too: it represents the trade-off mentioned above. I also show that investment triggers may stay intact despite changes in the profit process, if the changes are restricted to the range of sufficiently high profits.

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Paper provided by EconWPA in its series General Economics and Teaching with number 0510002.

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Length: 30 pages
Date of creation: 09 Oct 2005
Date of revision:
Handle: RePEc:wpa:wuwpgt:0510002

Note: Type of Document - pdf; pages: 30
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Find related papers by JEL classification:
D41 - Microeconomics - - Market Structure and Pricing - - - Perfect Competition
D81 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Criteria for Decision-Making under Risk and Uncertainty

This paper has been announced in the following NEP Reports:

NEP-ALL-2005-10-15 (All new papers)
NEP-MIC-2005-10-15 (Microeconomics)

References listed on IDEAS
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Dixit, Avinash, 1991. "Irreversible Investment with Price Ceilings," Journal of Political Economy, University of Chicago Press, vol. 99(3), pages 541-57, June. [Downloadable!] (restricted)
Sodal, Sigbjorn, 1998. "A simplified exposition of smooth pasting," Economics Letters, Elsevier, vol. 58(2), pages 217-223, February. [Downloadable!] (restricted)
Drazen, Allan & Sakellaris, Plutarchos, 1999. "News About News: Information Arrival and Irreversible Investment," Macroeconomic Dynamics, Cambridge University Press, vol. 3(03), pages 451-462, September. [Downloadable!]
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Other versions:
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Other versions:
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repec:cup:macdyn:v:3:y:1999:i:3:p:451-62 is not listed on IDEAS
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Other versions:
- Tarun Sabarwal, 2005. "The non-neutrality of debt in investment timing: a new NPV rule," Annals of Finance, Springer, vol. 1(4), pages 433-445, October. [Downloadable!] (restricted)

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